Cash refunds for R&D expenditure

Technology sector

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OverviewAs global economic activity shifts towards innovation and knowledge, Ireland’s future prosperity depends on its ability to create and expand scientific and technical expertise.

Research and development (“R&D”) is one of the key drivers of productivity and growth. Raising R&D levels in business is, therefore, a key priority for the Irish Government.

To help foster R&D growth in Ireland, the Irish Government has continued to improve the R&D tax credit incentive and it has been enhanced significantly in recent years to offer companies cash refunds for R&D work performed.

This regime has enabled companies to reduce their payroll costs year-on-year and increase their cashflow which has allowed them to recruit targeted hires and increase margins on qualifying R&D projects. This has also helped global multinational companies attract further R&D investment onshore to Ireland.

Some examples of potentially eligible R&D:• ► Design, construction, and testing of systems, devices

or processes, such as new hardware or software components, digital interface and control systems.

• ► Integration of legacy and new systems, for example following corporate mergers or acquisitions, or adoption of an enterprise architecture.

• ► Data intensive activities, including, collection, storage and analysis, distribution and retrieval; defining or working with new or emerging data models and metadata standards, integration with third party content.

• ► Advances in network management and operational tools, development of wired and wireless technologies, designing mobile and interactive services, evolution of next generation network switching and control systems.

• ► Modification to existing processes or systems to improve throughout or increase efficiencies; establishing capacity, performance, scalability, availability, security.

• ► Development of virtualisation techniques to deliver scalable, secure and reliable business applications over the Internet.

• ► Implementation of grid computing concepts that maximise data centre utilisation, enabling demanding service level agreements to be met.

• ► Improvements to network infrastructure and application architectures to cope with peak-load activity.

• ► Delivering high-bandwidth Internet services that are both device and location independent.

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R&D regimeThe regime provides for a tax credit of 25% for incremental qualifying R&D expenditure in respect of R&D activities incurred by a company operating in the EEA1.

The credit is available over the amount of qualifying R&D spent in 2003. If no R&D was carried out in 2003, or the company did not exist in 2003, all qualifying R&D-related expenditure is eligible for the 25% benefit.

The credit is in addition to any existing deduction or capital allowances for R&D expenditure. In other words, for every €100 spent on qualifying R&D activity (revenue or capital expenditure), a company could be entitled to €25 cash back which is in addition to the 12.5% corporate tax deduction. Therefore, up to 37.5% effective tax relief could be obtained for R&D expenditure, if it falls within the scope of this scheme, equating to €37.50 of every €100 spent.

This coupled with the availability of grant support can help companies significantly reduce their cost of doing R&D in Ireland, as illustrated by the attached example:

1European Economic Area which includes Norway, Iceland and Liechtenstein.

The basic criteria to qualify as R&D relies on the project seeking to achieve a scientific or technological advance while attempting to overcome scientific or technological uncertainty. Qualifying R&D must also be:

• ► ►Systematic, investigative or experimental in nature, and

• ► Conducted in a Revenue approved field of science or technology

• ► Involve basic research, applied research and/or experimental development.

It is widely recognised that in the I.T. and software development sector R&D occurs in several disciplines such as software engineering, internet architecture, data management and hardware devices. Our experience shows that the definition of R&D for tax purposes extends beyond these fields and can include activities that occur in the wider business areas, such as the development of innovative internal software systems to support business process and regulatory change, or the development of unique hardware and software systems for the automated testing of new products.

What is R&D in the technology sector?

Don’t miss out! It’s not just about people in white coats working in labs; eligible R&D can include producing new, or improving existing, materials, products, devices, processes, systems or services. These areas which are typically embedded within the wider operations of companies tend to get overlooked.

A qualifying project in receipt of 20% grant funding:

R&D spend of 100Grant aid -20

Net of grant aid 80

CT deduction @ 12.5% (10) -

R&D credit @ 25% (20) -30

Net cost 50

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Not surprisingly, as the level of claims for cash refunds has begun to escalate, so too has the level of Revenue scrutiny, both in the form of formal audit notifications and requests for additional evidence to validate the R&D claims.

Companies have twelve months from the end of the accounting period in which the R&D expenditure was incurred to submit their R&D claim to the Revenue. Companies need to be aware that Revenue has the right to audit claims for four years after the return has been submitted. If adjustments arise during the course of an audit (such as overstated claims or insufficient supporting evidence), there may be a requirement to re-pay part or all of your credit previously claimed. In addition to this, in some cases Revenue can seek interest and penalties.

What we are seeing as current trends

This should not deter companies from making claims, but it does mean that companies should ensure they have the proper level of supporting evidence in place both on the financial and scientific aspects of their claim. Companies must be able to substantiate the level of relief claimed, through the provision of supporting scientific and costing data. It is imperative therefore that finance departments are closely linking in with their R&D departments in order to build the support for R&D claims.

We recommend that companies undertake contemporaneous data capture for financial and scientific/technical aspects of projects that may be eligible for relief. This not only ensures that sufficient accuracy and detail can be captured, and hence maximise claims, but also enables companies to be in a position to readily provide the support for any claims to Irish Revenue. Frameworks and systems can be built on existing business processes, implemented to facilitate data capture and in turn reduce the overhead it entails. Using such frameworks, a repeatable and robust process can be employed to support claims for future years.

Companies need to be aware that Revenue has the right to audit claims for four years after the return has been submitted... companies should ensure they have the proper level of supporting evidence in place

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How can Ernst & Young help?

Who we are• We are a dedicated and highly specialised team

focusing on assisting clients maximise their R&D tax claims.

• A multi-disciplinary team made up of engineers, PhDs, industry specialists and tax professionals.

• Our team includes experienced R&D professionals from Ireland, Canada, US and Australia where the R&D regimes have been in place for many years.

• We have a proven methodology for building robust R&D tax claims.

• We have extensive experience in successfully agreeing claims with the Irish Revenue both in advance and on audit.

• We liaise regularly with the Irish Revenue on R&D tax credit matters including potential legislative improvements in this area.

Our experience

• We have had a 100% success rate in Revenue audits for clients who filed R&D tax credit claims.

• We secured the first Irish Revenue pre-approval for a client in the software sector, which encompassed a technical review by an industry expert engaged by Irish Revenue.

• Ernst & Young conducts ongoing consultation and discussions with Revenue and the Department of Finance on R&D matters and what it means for businesses. We have lobbied for changes in law to improve the R&D tax credit regime such as:

• ► increasing the rate for sub-contracting activity

• ► increasing the rate of R&D credit from 20% to 25%

• ► seeking cash refunds for companies incurring tax losses

The R&D tax team is a dedicated group providing a full range of services to help clients claim and maximise their R&D tax benefits

How we can help

Prepare technical project

reports

Develop optimal claims methodology

Conduct technical

interviews

Free feasibility

study

Calculate R&D expenditure

In-house training sessions

Full Revenue audit support

Grant assistance

claims

Ernst & Young | R&D

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How can Ernst & Young help?

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ContactsWe would be delighted to meet with you to explore how this regime may offer benefits to your business.

Ian CollinsHead of R&D Tax Services

Tel: (01) 221 2638Email: Ian.Collins@ie.ey.com

Ernst & Young

Assurance | Tax | Transactions | Advisory

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